U.S. stocks rebounded on Tuesday as largely on-target inflation data and easing jitters over contagion in the banking sector cooled expectations regarding the size of a rate hike at the Federal Reserve’s policy meeting next week. The TSX underperformed Wall Street, as the energy sector fell amid oil prices sliding to a three-month low.
The S&P 500 and the Dow gained more than 1% and the tech-heavy Nasdaq surged more than 2%, after several sessions of risk-off turmoil driven by the fallout surrounding the implosion of Silicon Valley Bank and Signature Bank.
Financial stocks clawed back some losses, with the S&P 500 Banks index coming back from its steepest one-day sell-off since June 2020. The KBW Regional Banking index rose 2.1%.
Bank contagion fears were allayed on Tuesday as U.S. President Joe Biden and other global policymakers vowed the crisis would be contained.
“The market is having an opportunity to digest some of the news over the last couple of days,” said Matthew Keator, managing partner in the Keator Group, a wealth management firm in Lenox, Massachusetts. “(Investors) are seeing a coordinated effort with various government agencies, and with hindsight, they’re feeling as if things have contained themselves a bit.”
The Labor Department’s CPI report showed consumer prices cooled in February, largely in line with market expectations, with headline and core measures notching welcome annual declines.
Even so, inflation has a considerable way to go before approaching the central bank’s average annual 2% target.
But signs of economic softness, combined with the regional banking scare, have increased the odds that the Federal Reserve will implement a modest, 25 basis-point hike to its key interest rate at the conclusion of its two-day policy meeting on March 22.
Financial markets have now priced in a 74.5% likelihood that the central bank will raise the Fed funds target rate by an additional 25 basis points at the conclusion of its two-day monetary meeting later this month, with a growing minority - 25.5% - seeing the potential of no rate hike at all, according to CME’s FedWatch tool.
“Part of the stabilization today is folks feeling as if the Fed might back off from some of the hawkish expectations that followed Chairman Powell’s comments last week,” Keator added.
“If the Fed isn’t careful, they could create some unintended shocks to the system,” he said.
Shock waves following the closure of Silicon Valley Bank and Signature bank, which prompted Biden to vow he would contain the crisis and ensure the safety of the U.S. banking system, continued to reverberate throughout the sector.
The S&P 500 banking index reclaimed territory, rising 2.6% after Monday’s plunge, its biggest one-day drop since June 2020.
In bond markets, U.S. Treasury yields rose, a day after major declines, as investors consolidated positions and weighed the monetary policy impact of banking system turmoil against stubbornly high inflation.
In afternoon trading, U.S. Treasury two-year yields rose 19.5 basis points (bps) to 4.225%, while the benchmark 10-year yield gained 12 bps at 3.637%. A similar snapback was seen in Canadian bond yields.
Money markets were still pricing in cuts in the Bank of Canada’s overnight rate later this year, although less so than on Monday. While seeing only about a 25% chance of a cut at the next policy meeting in April, implied rates in swaps markets suggest the bank would have cut rates by 25 basis points by this summer. And they are pricing in an accumulated 50 basis points in rate cuts by the end of this year, according to Refinitiv Eikon data late Tuesday.
The Toronto Stock Exchange’s main composite index closed up 105.26 points, or 0.54%, at 19,694.16 after ending Monday down 0.9%.
Canada’s technology sector rose 2.6% while the materials group, which includes precious and base metals miners and fertilizer companies, rose 0.9%.
Heavyweight financials closed 0.8% higher in a partial rebound from Monday’s 2% decline.
Canada’s financial regulator said on Tuesday it was boosting the frequency and intensity of monitoring of institutional liquidity after SVB’s collapse.
Energy stocks fell 1.2%. Oil prices dropped over 4% to a three-month low after the U.S. inflation report and the recent U.S. bank failures sparked fears of a fresh financial crisis that could reduce future oil demand.
Brent futures fell $3.32, or 4.1%, to settle at $77.45 a barrel, while U.S. West Texas Intermediate (WTI) crude fell $3.47, or 4.6%, to settle at $71.33.
They were the lowest closes for both benchmarks since Dec. 9 and their biggest one-day percentage declines since early January. In addition, both contracts fell into technically oversold territory for the first time in weeks.
The Dow Jones Industrial Average rose 336.26 points, or 1.06%, to 32,155.4, the S&P 500 gained 64.8 points, or 1.68%, to 3,920.56 and the Nasdaq Composite added 239.31 points, or 2.14%, to 11,428.15.
All 11 major sectors in the S&P 500 ended the trading day higher, with communication services enjoying the largest percentage advance.
Shares of First Republic Bank and Western Alliance Bancorp surged by 27.0% and 14.4%, respectively, in a reversal of the previous session’s rout.
Meta Platforms Inc announced 10,000 job cuts in its second round of layoffs. Its stock advanced 7.3%.
Ride-hailing app rivals Uber Technologies Inc and rose 5.0% after a California state court revived a ballot measure allowing the companies to treat drivers as independent contractors rather than employees.
Uber rival Lyft Inc posted a more modest 0.6% gain.
United Airlines Holdings Inc fell 5.4% after the commercial carrier unexpectedly forecast a current quarter loss.
AMC Entertainment Holdings slid 15.0% between multiple trading halts after its shareholders voted in favour of converting preferred stock into common shares.
Advancing issues outnumbered declining ones on the NYSE by a 2.60-to-1 ratio; on Nasdaq, a 1.83-to-1 ratio favored advancers. The S&P 500 posted 3 new 52-week highs and 15 new lows; the Nasdaq Composite recorded 23 new highs and 195 new lows. Volume on U.S. exchanges was 13.84 billion shares, compared with the 11.64 billion average over the last 20 trading days.
Reuters, Globe staff
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